Domino’s: Mean Reversion in Action

I love this story. Not simply because I love pizza (my philosophy is that even bad pizza is good pizza), but because it’s a great example of mean reversion in action. One should never write off a company that is struggling. Companies with a poor return on equity can take steps that can turn their situation around and often do.

By 2010, Domino’s stock was devastated. The stock was down 57% from 2005 to 2010. It was struggling with a battered and beaten brand in a boring industry. They successfully turned the situation around with some creative thinking and hard work. Since the strategy change, Domino’s is now up 1,453%. That beats the storied Amazon, which is up 557% over the same period. It all happened in a boring, conventional industry with a company that Wall Street wrote off.

Domino’s isn’t currently the kind of stock I would buy. It is currently trading at 42 times earnings. It’s a great company but I’m not getting any margin of safety from the investment. With that said, there were numerous opportunities in the 2010-2012 period when it had a solid margin of safety.

It is a story like this to keep in mind the next time a growth investor asks you “why are you investing in this crap?” Crap can turn to gold. It happens more often than is typically appreciated.